$950,000 recovery from brokerage firm that negligently approved a fraudulent investment product for sale to customers and negligently supervised its broker.
Structured products come in many forms and are often referred to as market-linked products. They are defined as products that are “derived from or based on a single security or securities, a basket of stocks, an index, a commodity, debt issuance and/or a foreign currency,” and include “index and equity-linked notes, term notes, and units generally consisting of a contract to purchase equity and/or debt securities at a specific time.”
Structured product strategies start with a security, but payments are made that have been derived from an underlying asset. These types of investments are extremely complex, often expensive for consumers and investors, highly lucrative for brokerage firms and other financial institutions, and far more complex than most other financial products. Because of their complexity and sales abuses concerning them, the Financial Industry Regulatory Authority has issued notices stressing the importance of fully explaining these products to investors so that they are understood and suitable. FINRA has also warned that they have disadvantages as regards risk, liquidity, and hidden fees.
Structured Product Sales Abuses
The NASD, (now known as FINRA), issued Notice to Members 05-59, “NASD Provides Guidance Concerning the Sale of Structured Products.” FINRA warned in 2011 that while structured products can seem attractive to investors because they offer higher returns and a level of principal protection, subject to the creditworthiness of the issuer, they “can also have significant drawbacks such as credit risk, market risk, lack of liquidity, and high hidden costs.”
Most structured products are not suitable for retails investors. They often are marketed to consumers as a predictable source of income or as a conservative investment. Many are marketed as being “100% principal protected,” ignoring the substantial risk posed by the derivative security in the product. In addition, many brokers and brokerage firms assure investors of the safety of structured products by referring to the product’s credit rating, even though these ratings reflect the creditworthiness of the issuing company and have nothing to do with the potential performance of the investment. The risks in these products can include:
Structured products are often marketed to investors as conservative investments notwithstanding the fact that they are usually incredibly risky. Promises of predictability may be based on the credit rating of the issuing company which is unrelated to how the investment will perform. Retail investors who are sold these products face many potential risks which a savvy investment fraud attorney understands.
Because of these hidden risks, these products raise the question of suitability for most investors. A broker who recommends them may be in violation of his or her fiduciary duty to recommend only what is in the best interests of the client.
If you have suffered a substantial loss because your broker failed to properly disclose the risks associated with structured products, contact a Miami structured products lawyer at Levin Law. Our attorneys can review your case to determine if you have been victimized through broker misconduct or securities fraud.
Contact a Miami structured products attorney at (305) 402-9050 today. We look forward to speaking with you to determine your options through a free case evaluation.